Now Britain faces single European tax system

Plans to create a single European system for tax and social security are being privately prepared in Brussels by a powerful alliance of countries, including France and Germany. They envisage control over income tax being pooled by national governments inside the single currency area.

The plans, contained in papers seen by The Independent, but which are unlikely to have been submitted yet to the British government, are part of the strategy for a new "flexible" Europe. In practice, they are likely to kill off any remaining chance of Britain joining the single currency in the foreseeable future. The plans will be widely viewed in Britain as an attempt by France and Germany to alter radically the fundamental character of the union and the Euro-sceptics will now have new cause to argue that Britain's entire relationship with the European Union should be renegotiated.

Opponents of the single currency have always suggested that it would eventually mean a single European economic policy, covering tax and social security. The new proposals reveal that Paris and now Bonn agree and are seriously contemplating forging ahead with what will be, in effect, a single hard-core economy. This thinking is so far ahead of what Westminster has contemplated that it makes British membership of monetary union (EMU), under a Conservative or a Labour government, very unlikely. Last night a Downing Street spokesman said he was unaware of any such decisions. "Any treaty changes relating to tax policy would require unanimity," he stressed.

By contrast, France and Germany are spearheading the drive to ensure that powers to build a common economic policy are written into a "flexibility" chapter in the next treaty on EU reform, due in June. An official EU report, summarising how member states view a multi-speed Europe, specifically mentions economic and monetary union as a key area, where some states will want to move faster than others.

The report does not directly call for harmonising direct tax and social security. However, according to highly placed sources in Brussels, France and Germany have signalled that they want power to integrate in these areas after the EMU launch.

Common policies on direct tax and social security may not be possible until a few years after the EMU launch, France and Germany concede. But they want the right to go ahead to be written into European law now.

Other priority areas singled out in the report for faster power sharing are immigration and criminal justice, environment law, and indirect taxation under the single-market rules. The proposals are being circulated amid intense debate about how Europe can deepen integration without being blocked by Britain or any other members states who oppose further power-sharing.

Next Monday, member states will hold the first formal discussion on the new "flexibility" chapter. A separate European Commission blueprint for flexibility, to be discussed by the commission today, also leaves open the possibility of greater economic power sharing under monetary union.

Under the "multi-speed" arrangement envisaged by the Commission, Britain would not be forced to join the new round of power-sharing, but would be unable to stop other member states moving ahead.

The blueprint says that a decision on whether core groups share new power in future should be taken by qualified majority vote. A minimum of, perhaps, eight countries would be necessary before powers were shared under the new "flexibility" arrangement.

t A Labour government would oppose any new arrangements within the European Union which would allow an inner core of member countries to press ahead with integration while others remained permanently on the sidelines, Tony Blair says in an interview with the Financial Times today.